Rs 500 and Rs 1000 notes banned: All you need to know how the sudden move by the Modi Government will make a difference

PM Narendra Modi’s announcement to demonetise Rs 500 and Rs 1000 notes have created hue and cry among the public. The surprise move of the NDA Government is a surgical strike on corruption, black money and fake currency. From midnight of November 8, 2016 the notes of Rs 500 and Rs 1000 just turned to be worthless pieces of paper with PM Modi declaring a decisive war against the menace of corruption.

In his speech, PM Modi also said that new Rs 2,000 and Rs 500 notes will be introduced and the old notes can be exchanged for value from offices of Reserve Banks, any bank branches, head post offices or sub post offices.

Points to be noted

On Nov 9 all the banks will be closed and ATM’s won’t be functional. From November 10 till December 30 you can deposit the old notes at your nearest bank or post office accounts without any limit. For the time being the withdrawals from banks are capped at Rs 10,000 per day and Rs 20,000 per week. This limit will be increased in the coming days.

For the exchange Rs 500 and Rs 1000 notes, one must produce valid government identity cards like PAN, Aadhaar and Election Card. Exchange limit has been capped at Rs 4,000.

New notes of Rs 500 and Rs2000 will be issued by RBI from November 10 onwards.

This was the second bold step taken by the Modi government to curb black money after Arun Jaitley announced on October 2016 that Rs 65,250 crore worth “black money” was disclosed in the form of cash and other assets during a four-month window — Income Disclosure Scheme (IDS). He said 64,275 declarations were made with an average of Rs 1 crore each filing. Jaitley said the declarants have the flexibility of paying their taxes — including 7.5% penalty and 7.5% surcharge — in installments up to September 2017. However, they are warned to pay the 50% of the amount by March. According to recent reports, the government’s total tax collection – direct and indirect — stood at Rs 14.60 lakh crore in 2015-16.

Speaking on the present decision of the Government, Arun Jaitley said that the move would help make more and more transactions become digital, he said, adding now people will disclose income and pay taxes. “India will become a more tax compliant society.”

History of demonetisation

According to RBI data, this sudden move of the present government is not new. In January 1946 and 1978, Rs 1,000 and higher denomination notes were first demonetised.

The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But these notes were demonetised in January 1946 and again in January 1978.

Who will be affected by the ban?

This sudden move will be a huge blow to people who have stored their houses with black money.

Real estate will be affected as most of the buyers in real estate are doing the transactions in black money. However, the analysts pointed out that the sector will gradually recover from the fall.

Daily wages workers and the street vendors will be affected by the ban of Rs 500 and Rs 1000.

The ban would reduce inflation and curb an artificial increase in the real estate market and the education sector.

The markets will be under turmoil as this move will impact capital liquidity. Consumers will certainly not visit markets for a few days.

Though the sudden move got mixed reaction from the public with some lauding the decision and some complaining about the quick announcement, over a period of time we hope that the situation will become normal.

Further information is available at our website (www.rbi.org.in) and GoI website (www.rbi.org.in).